AEC 103 – Intermediate Accounting

ASSIGNMENT 3
Accounts Receivable and Estimation of Doubtful Account

Problem 1
Master Company reported the following information before adjustments at year-end:

Accounts Receivable 500,000

Notes Receivable 200,000
Allowance for Doubtful Accounts 20,000
Sales 5,000,000
Sales Return and Allowances 30,000
Sales Discount 20,000

REQUIRED:
Prepare adjusting entry to provide for doubtful accounts under each of the following
independent assumptions:

a. Past experience indicates that 75% of all sales are credit sales and that an
average 2% of credit sales may prove uncollectible.
b. One percent of gross sales may prove uncollectible.
c. An analysis of the aging of trade accounts receivable indicates that accounts
receivable in the amount of P80,000 may prove uncollectible.
d. The policy is to maintain an allowance for doubtful accounts equal to 10% of the
outstanding accounts receivable.
Answers for problem 1:

1. Credit sales (75% x 5,000,000) 3,750,000

Doubtful accounts (2% x 3,750,000) 75,000

Doubtful accounts 75,000

Allowance for doubtful accounts 75,000

2. Doubtful accounts (1% x 5,000,000) 50,000

Allowance for doubtful accounts 50,000

3. Required Allowance 80,000

Less: Credit balance of allowance 20,000
Doubtful accounts expense 60,000

Doubtful accounts 60,000

Allowance for doubtful accounts 60,000

4. Required Allowance (10% x 500,000) 50,000

Less: Credit balance of allowance 20,000
Doubtful accounts expense 30,000

Doubtful accounts 30,000

Allowance for doubtful accounts 30,000
Problem 2
At the beginning of current year, Tres Company showed the following account balances:

Accounts receivable 1,000,000

Allowance for doubtful accounts 40,000

The following summary transactions occurred during the current year:

1. Sales on account, 2/30, n/30 7,000,000

2. Collections from customers w/in the discount period 2,450,000
3. Collections from customers beyond the discount period 3,900,000
4. Accounts receivable written off as worthless 30,000
5. Recovery of accounts previously written off not included
In the above collections 10,000

6. Credit memo for sales return 70,000

REQUIRED:
a. Prepare journal entries pertaining to accounts receivable.
b. Prepare the adjustment for doubtful accounts at year-end if the entity uses the
percentage of accounts receivable method consistently.
c. Determine the net realizable value of accounts receivable at year-end.

Journal Entry
Account Titles Debit Credit
Accounts Receivable 7,000,000
Sales 7,000,000

Cash 2,450,000
Sales Discount 49,000
Accounts Receivable 2,401,000

Cash 3,900,000
Accounts Receivable 3,900,000

Allowance for Doubtful Accounts 30,000

Accounts Receivable 30,000

Accounts Receivable 10,000

Allowance for Doubtful Accounts 10,000

Cash 10,000
Accounts Receivable 10,000
 Sales Return 70,000
Accounts Receivable 70,000

b. adjustment for doubtful accounts at year-end if the entity uses the percentage of
accounts receivable method consistently.

Doubtful Accounts 40,000

Allowance for doubtful accounts 40,000

(Rate = 40,000 / 1,000,000 = 4%)

Allowance for Doubtful Accounts - December 31 (4% x 1,500,000) 60,000

Less: Allowance before adjustment 20,000
Doubtful Accounts Expense 40,000

c. net realizable value of accounts receivable at year-end.

Accounts Receivable 1,500,000

Allowance for Doubtful accounts (60,000)
Net realizable value 1,440,000